Shandong Ruifeng Chemical (SZSE:300243) Will Be Hoping To Turn Its Returns On Capital Around

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Shandong Ruifeng Chemical (SZSE:300243) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Shandong Ruifeng Chemical, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.054 = CN¥87m ÷ (CN¥2.1b - CN¥521m) (Based on the trailing twelve months to June 2024).

Thus, Shandong Ruifeng Chemical has an ROCE of 5.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.5%.

View our latest analysis for Shandong Ruifeng Chemical

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shandong Ruifeng Chemical's ROCE against it's prior returns. If you'd like to look at how Shandong Ruifeng Chemical has performed in the past in other metrics, you can view this free graph of Shandong Ruifeng Chemical's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Unfortunately, the trend isn't great with ROCE falling from 17% five years ago, while capital employed has grown 147%. Usually this isn't ideal, but given Shandong Ruifeng Chemical conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Shandong Ruifeng Chemical's earnings and if they change as a result from the capital raise.

On a side note, Shandong Ruifeng Chemical has done well to pay down its current liabilities to 24% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shandong Ruifeng Chemical. In light of this, the stock has only gained 13% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Shandong Ruifeng Chemical (of which 2 can't be ignored!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.